FHFA Final Rule on Duty to Serve Opens Up GSEs to Receive Credit for Chattel MH

On December 13, the Federal Housing Finance Agency (FHFA) published their final and long awaited rule on “Duty to Serve” (DTS). In 2008 there was federal legislation that created a mandate for FHFA and the Government Sponsored Entities (GSEs) they regulate to serve certain underserved markets that specifically included manufactured housing. Since 2008 the limited service the GSEs provided related to MH were commercial loans on MH communities. There was very little done for consumer loans to purchase manufactured homes, in particular personal property manufactured homes. Citing census data FHFA estimates 80 percent of MH loans in 2015 were chattel, which is up from 67 percent in 2009.

The MH industry, led by our national organization MHI and members of MHI’s Financial Services Division have worked with the GSEs and FHFA to educate and advocate for the inclusion of chattel MH loans into the GSEs’ portfolio. Many state associations, including TMHA, submitted comments letters as well pushing for changes, specifically to include chattel MH loans as eligible activities for the GSEs to receive DTS credit.

It wasn’t just industry pushing for these changes. Reversing their 2010 position in opposition to chattel inclusion, consumer advocates, tenants’ advocates, and resident owned community advocates now similarly encouraged MH chattel support be included in the final rule.

What is included?

The rule lays out four specific areas for MH – two related to real and chattel MH loans to consumers and two related to commercial loans for MH communities.

Chattel MH

Including chattel in the final rule was a victory for the MH industry and the consumers we serve. There are those in our industry that wish the rule went further, was less vague, and mandated tighter constraints on the GSEs. But allowing the GSEs to get DTS credit for chattel MH loans is an improvement and a critical first step in the right direction.

In the previously proposed rule no credit would have been given for chattel MH loans. However, FHFA was clearly persuaded by the comments (FHFA received nearly 1,400 comments on the MH chattel inclusion issues alone, including three Members of Congress) and many meetings with industry and advocates to include chattel in the final rule.

The chattel eligible provisions will begin as a pilot initiative. FHFA is operating under an oversight and performance evaluation system for the chattel pilot. They want to ensure a chattel program can be successful and viable before there can be any expansion.

To begin with FHFA needs better performance data on chattel loans. Lack of data was clearly a concern for FHFA. The rule cited the only limited data currently available - FHA Title I data. However, the rule contemplates improvements on chattel data collection, including partnering with current industry lenders who have successfully held chattel loans in portfolio. Other risk mitigation measures will also be utilized such as higher loan level pricing and guarantee fees. Loan modification efforts for borrowers in distress will also be considered so that home owners stay in homes and losses are further mitigated.

Any chattel pilot would have to adhere to strict underwriting. Specifically, FHA contemplates tighter credit scores, down payments, loan-to-value ratios (LTV), debt-to-income ratios, and borrower reserves. FHFA also mentions creating new relationships with private mortgage insurance providers as well as originating lender recourse on defaulting loans in the form of loan repurchases or 10 percent loss sharing.

As any GSE pilots move forward it will be critical that our industry continue to advocate for broader consumer credit worthiness criteria. As one industry expert who has been working close on the effort summarized, the industry and would be lenders don’t need a program that is limited to the cream of the crop borrowers. A program needs to extend, with appropriate risk pricing and underwriting like appropriate down payments, to those borrowers in mid to lower 600 FICO range.

In addition to data, underwriting and loss mitigation, FHFA would require borrower and tenant protections. The final rule leaves the details of borrower protections to be determined based on future stakeholder feedback.

In conjunction with the requested stakeholder feedback, the final rule issues a Request for Information (RFI) on exactly how to design and implement a chattel pilot program. The industry will continue to be actively engaged in all RFI efforts.

Real Property MH

FHFA adopted the same standards they apply to single-family site-built housing for MH real property loans. There was more good news for the industry when FHFA dismissed comments to have modified terms and conditions for real property MH compared to site-built or limitations to only provide refinancing opportunities for homeowners with high interest rates.

The final rule holding MH real property in parity to all other site-built housing is another step in the right direction for the final rule.

MH Community Loans

The final rule provides two avenues of DTS credit for the GSEs engaged in commercial lending to MH communities. The first are for MH community loans to communities owned by government units or instrumentalities, nonprofits, or residents.

The second eligible DTS credit program are for privately owned community’s (investor owned communities) that have certain pad lease protections. FHFA stated their intent with the final rule is, “to encourage manufactured housing communities to adopt pad lease protections for tenants, or enhance existing pad lease protections.”

The required pad lease protections mandated by the rule in order for a community to be eligible for DTS credit are:

• One-year renewable lease term unless there is good cause for nonrenewal;
• 30-day written notice of rent increases;
• 5-day grace period for rent payments, and the right to cure defaults on rent payments; and
• Right of tenants to: (A) Sell the manufactured home without having to first relocate it out of the community; (B) Sublease the home or assign the pad lease for the unexpired term to the new buyer of the tenant’s manufactured home without any unreasonable restraint; (C) Post “For Sale” signs; (D) Sell the manufactured home in place within a reasonable time period after eviction by the manufactured housing community owner; and (E) Receive at least 60 days advance notice of a planned sale or closure of the manufactured housing community.

It is worth mentioning that many of Texas’ state law requirements exceed several of the minimum requirements laid out in the final rule. FHFA did say that state laws that exceed the rule’s minimum requirements would also receive DTS credit.

In Texas there is a 60-day notice for rent increases, a 10-day grace period with a specific statutory notice and right to cure unpaid rent, and 180-day notice prior to a community changing use or closure. The FHFA rule on sale notice is slightly different than the Texas law in that 60-day tenant notice would be required if the community is going to be sold to a new investor owner who will take over the existing leases and continue to operate the property as a MH community. However, the rule makes clear that it does not mandate a tenants right of first refusal to have the option to purchase a community if offered for sale.

Community owners can still obtain GSE supported commercial loans without having the required pad lease protections so long as the GSEs are offering such loans, like they currently offer. The difference being that for more traditional commercial loans the GSEs would not receive DTS credit.

FHFA also outlines in the rule methodologies to make sure would be eligible communities meet the required affordability thresholds.

What is not Included?

Non-HUD code homes are not eligible under the final rule. This is to say that “mobile homes” built prior to 1976 were excluded from eligibility. FHFA did say in the final rule that if in the future structural integrity concerns of pre-HUD code homes could be achieved, then perhaps later inclusion would be possible.

Conclusion

The final rule has created increased opportunities for the GSEs to develop pilot programs that would operate in the MH chattel space. It will take time and continued involvement directly with the GSEs in order to develop and implement successful MH chattel programs. However, with the final rule and the incentive created for DTS credit for chattel programs there is cause for optimism.

On the community lending side, we expect the GSEs to continue in this space as they currently are, with additional possible expansion for loans to communities that would also generate DTS credit for the GSEs.